Financial Conditions Rise to Record on Debt Deal: Reality Check

U.S. financial conditions climbed to the highest level on record as the Senate crafted a deal to raise the debt ceiling and avert a default.

The Bloomberg U.S. Financial Conditions Index (BFCIUS) increased 0.10 to 1.51, the highest in records dating back to January 1994. The gauge measures stress in the markets by combining everything from money-market rates to yields on government and corporate bonds to volatility in equities. During the debt-ceiling debate of August 2011, the index fell as low as negative 1.631.

The measure rose from last week’s one-month low of 1.16 as the Senate and House plan to vote as soon as today on the agreement that would end the 16-day-old government shutdown and allow the U.S. to continue borrowing, a day before its authority lapses. House Republicans today signaled that they will let the accord pass largely with Democratic votes.

“Everyone is basically assuming we’re going to get a vote on a deal sometime today, if not in the next few hours,” Mark McDonnell, a senior money manager at Hillswick Asset Management LLC in Stamford, Connecticut, which manages $1.3 billion, said in a telephone interview.

The Senate compromise would fund the government through Jan. 15, 2014, and suspend the debt limit until Feb. 7.

Treasuries

One-month Treasury rates fell 20.8 basis points to 0.14 percent at 4:12 p.m. in New York after touching 0.45 percent, according to data compiled by Bloomberg. The benchmark 10-year yield (USGG10YR) fell 6 basis points to 2.66 percent, according to Bloomberg Bond Trader data.

Stocks

The Standard & Poor’s 500 rose 1.38 percent to close at 1,721.54, almost climbing to its all-time high of 1,725.52 reached on Sept. 18. The Dow Jones Industrial Average gained 205.8 points, or 1.4 percent, to 15,373.83.

Rate Swaps

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, rose 1.13 basis points to 13.38 basis points. The gauge typically narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities. The measure has dropped from this year’s high of 19.55 on June 21.

Default Swaps

A gauge of U.S. company credit risk fell. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, declined 3.4 basis points to a mid-price of 73.7 basis points, according to prices compiled by Bloomberg. The index, which typically rises as investor confidence deteriorates and falls as it improves, has averaged 81.7 this year.

Currencies

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, fell 0.07 percent to 1,011.89. The index has traded in a range of 1,007.9 and 1,038.63 in the past three months.

Volatility

The CBOE Volatility Index (VIX), or VIX, plummeted 21.17 percent to 14.71, the lowest level since Sept. 26. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index fell to 73.17, compared with the average this year of 72.48. Currency swings as measured by the JPMorgan Global Volatility Index were unchanged at 8.34.

Energy, Commodities

West Texas Intermediate crude oil for November delivery rose $1.00, or 0.99 percent, to $102.21 a barrel on the New York Mercantile Exchange.

Gold futures for December delivery rose 0.66 percent to $1,281.6 an ounce on the Comex in New York.

Copper futures for delivery in December rose 0.1 percent to $3.311 a pound on the Comex in New York.

To contact the reporter on this story: Matt Robinson in New York at mrobinson55@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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